Alleviation of Poverty As a Priority for Socio-Economic Development in Russia

Chapter 1 Alleviation of poverty as a priority for socio-economic development in Russia

1.1. POVERTY IN THE PERSPEC- onitoring, which aims to measure preva- TIVE OF THE MILLENNIUM Mlence of poverty, traditionally seeks DEVELOPMENT GOALS answers to two questions: how many people or households are below the poverty line (the eduction of extreme poverty is defined as share of the poor) and how poor they are (the Rprimary among the development goals resource deficit of the poor, poverty gap). This formulated in the Millennium Declaration. is also the basis for targets to be addressed by states implementing the Millennium t is clear from consideration of the problem in Declaration and for indicators measuring Ian international context that poverty is, by its progress in attainment of MDG Goal 1. very nature, relative. In countries with a lower level of economic development poverty is arget 1. To halve the number of people mainly manifested in such phenomena as Tliving in extreme poverty by 2015. The hunger, lack of potable water, illiteracy, high following indicators are suggested for mortality from elementary diseases (e.g. diar- appraising efforts to achieve that goal: rhea). In developed countries lack of means to – the share of people with current consumption resources below one dollar 1% of the Russian population was in (USD 1) a day1; extreme poverty by the Millennium – poverty gap dynamics based on a poverty Declaration definition (poverty line of line of USD 1 a day; USD 1 per day) in 2003, and 5% were in – the share of consumption by the poorest extreme poverty by the World Bank defi- 20% of people in overall consumption. nition (USD 2.15). arget 2. To halve by 2015 the number of buy a car or secure a mortgage loan may be Tpeople suffering hunger. Achievements defined as poverty, and most emerging markets in meeting this target will be measured by: include a wide range of durable goods in the – prevalence of weight deficiency among minimum consumer basket for poor families. children under 5 years of age; – the share of people with calorie consump- ut, despite significant differences in what tion levels below the minimum. Bis classed as low material welfare standards in countries with different levels of eco- he share of the Russian population in nomic development, final analysis of the notion Textreme poverty is much less than 20%, so of poverty leads to a single set of goods, serv- Target 1 can be viewed as largely achieved. ices and satisfied needs, lack of which is con- Monitoring and indicators relating to the share sidered inadmissible in any country today. of people with income below USD 1 a day (and

30 Human Development Report for the Russian Federation 2005 to the respective poverty gap) concern allevition Russia experienced a major redistribu- of extreme poverty. There are no relevant offi- tion of resources in favor of the medium- cial data for Russia, since the Federal State and high-income strata of society as it Statistics Service measures poverty on the basis entered the phase of economic crisis and of the official subsistence minimum, which is market transformation in the early 1990s. much higher than one dollar. The World Bank uses a poverty line equal to USD 2.15 daily of both poverty and inequality: the lower the income to define extremely low living standards resources of the poorest 20%, the higher both in the region which includes Russia, since cold poverty and inequality. Data presented in climates require additional essential spending Figure 1.1 show that Russia experienced a on heating, winter clothing and foodstuffs2. major redistribution of resources in favor of the medium- and high-income strata of socie- he World Bank calculates that 6.1% of the ty as it entered the phase of economic crisis TRussian population were in extreme pov- and market transformation in the early 1990s. erty in 2000, based on a poverty line of USD The indicator varied in a range of 5.8–6.1% 2.15 per day. Data for 2003 available from the from the mid 1990s until 2000, which we take National Survey of Welfare and Participation of as the start point for Russian economic the Population in Social Programs (NOBUS)3 growth, when it settled at a level of 5.6%. That allow us to give more up to date expert esti- shows that the poor have not received priori- mates of extreme poverty in Russia. The results ty access to the fruits of economic growth, suggest that 1% of the Russian population was and suggests potential for poverty reduction. in extreme poverty by the Millennium Declaration definition (poverty line of USD 1 per he criteria of calorific value of food and day) in 2003, and 5% were in extreme poverty Tweight deficiency among infants serve to by the World Bank definition (USD 2.15). identify undernourishment and hunger. Calorie consumption data, unlike data on or countries with a low level of economic daily incomes below USD 1 or USD 2.15, are Fdevelopment the share of the poorest regularly published in Russian official statis- 20% of the population in total consumption is tics. These statistics can be compared with a measure of extreme poverty. But in Russian calorific norms of the official Russian mini- conditions this share approximates to official poverty levels with an overlap to families, Figure 1.1. Share of the poorest 20% of who are not officially classified as poor: in the Russian population in total income, 2004 the Russian official definition of the 1970–2003, % poverty line classified 17.8% of the population as poor. We should note that the official 10.1 10 Russian subsistence minimum (poverty line) 9.5 9.8 is 5–6 times higher in price terms than the 7.8 extreme poverty line of USD 1. In what fol- 6.1 6.1 66 lows we will use the World Bank poverty line 5.8 5.8 5.6 5.6 5.6 of USD 2.15 a day to define extreme poverty (Box 1.1).

t is important to emphasize that resources Iof the poorest 20% of society are a measure 1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003

31 Chapter 1

mum consumer basket to estimate what pro- insufficient height). Incidence of undernour- portion of the population is undernourished. ishment among Russian children differs little By this standard, nearly 40% of the Russian from its incidence in developed countries, population is undernourished in calorie and the indicator is much better than in devel- terms and 60% of Russians do not eat oping countries7, but the very existence of enough protein. However, the average such an extreme form of poverty is sufficient Russian daily consumption level of 2684 calo- grounds for monitoring it and designing ries means that Russia does not qualify as measures to overcome it. malnourished by international standards4. n conclusion, an overview of official statis- fficial data on calorie consumption do not Itics, results of alternative research, and our Otake account of eating away from home, own calculations indicate that: which adds about 20% to consumption levels. 1. Incidence of extreme poverty in Russia, After this adjustment the percentage of measured by criteria defined in the Millen- Russians, who are undernourished by stan- nium Development Goals, is in a range of 1- dards of the minimum consumer basket, 5% of the population. However, an account of declines to 10-15%. In any case, the calorie con- the marginalized groups would increase the sumption standard implied by Russia’s official overall incidence of extreme poverty. minimum consumer basket is well above the 2. Malnutrition is a relevant aspect of poverty in modern Russia. The current Russian social security system 3. Standards, which are used to measure includes targeted assistance to vulnerable poverty in Russia, do not allow monitoring in groups, but does not treat the poor as a full compliance with the indicators set out in priority group for social programs. the Millennium Development Goals. 4. Tracking of poverty dynamics in compli- required daily calorie intake for normal meta- ance with the Millennium Development bolic functioning (1500 calories)5, which serves Goals would require modernization of the as a calorie criterion for malnutrition. The data entire system of indicators used by Russian available to us suggest that 1-3% of the Russian poverty monitoring. population are affected by this form of extreme 5. The current Russian social security sys- poverty, but we should stress again that official tem includes targeted assistance to vulner- statistics do not keep track of it. able groups, but does not treat the poor as a priority group for social programs. ncidence of weight deficiency among chil- Idren under 5 in Russia is measured by anthropometric research on nutrition. The 1.2. SPECIFIC ASPECTS OF only source of information is research organ- POVERTY IN RUSSIA AND MEA- ized by the Institute of Nutrition6, which has SURES FOR ITS ALLEVIATION found that cases of acute and chronic undernourishment do exist in Russia and are con- overty is a distinctive feature of Russia centrated among families with lowest Ptoday, and has inevitably attracted the incomes. Abnormally low height and weight attention of executive and legislative branch- suggesting chronic nutrition deficiencies are es of power, and of society as a whole. most common among infants (usually low Halving the incidence of poverty is a declared weight) and in the 7-10 age group (usually priority goal of the Medium term Program for

32 Human Development Report for the Russian Federation 2005 Socio-Economic Development of the Russian Figure 1.2. Household income dynamics, Federation (2005-2008). 1991 =100%

100 review of the problems of poverty in ARussia should start with a brief descrip- 80 tion of general trends in the level and structure of personal incomes. Price liberalization in 60 1992 cut real personal incomes by half, and reduced real wages and pensions by even 40 more. There was a recovery in subsequent years, but the 1998 crisis brought real incomes 20 back to their level in 1992. For the household sector as a whole cumulative changes in per- 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 capita income during the reform years have not brought incomes back to their prereform Real cash income (1991=100%) Real wages (1991=100%) level. That is despite a fairly high rate of Real pension (1991=100%) income growth since the crisis of August 1998 (Figure 1.2). It is true both for incomes as a rends in income levels and income whole and for the two main sources of money Tinequality have effectively determined income for households: wages and pensions. trends in the scale and depth of Russian poverty. However, income volumes and hese changes have been accompanied by the principles of income distribution are not Tappearance of new sources of money income the only factors that regulate poverty in Russia: from entrepreneurial activity and from (measured in money terms): the choice of property. The share of these new sources in over- conceptual approaches in defining the all income has been growing, while the share of poverty line and adequacy of income are wages has been steadily declining. just as important.

ata of the Federal State Statistics Service Figure 1.3. Dynamics of income and Dconcerning inequality in distribution of wage differentiation indicators revenues and labor compensation in Russia 70,0 0,508 0,550 show how redistribution of overall cash 0,480 0,483 0,477 0,454 0,447 0,439 0,445 income has taken place (Figure 1.3). Main 0,396 0,399 0,394 0,398 trends in development of the Gini coefficient 0,409 0,400 0,317 0,381 0,375 0,381 have been as follows: 39,6

34,0 32,1 – threefold growth in the initial transition 30,5 26,4 26,4 0,260 25,0 period (from 1992); 23,4 24,0 – decline (due to the 1998 crisis), followed 15,1 14,3 13,5 13,0 13,5 14,0 13,8 14,0 14,0 by new growth; 7,8 – high and steady levels of inequality in 4,5 recent years. 0,0 0,000 1991 1994 1995 1996 1997 1999 2000 2001 2002 2003 Average income of 10% of people with highest income compared with average income hus, in 1999-2003 nearly a half of total of 10% with lowest, times (left scale) Average wage of 10% of people with highest wage compared with average wage Tmoney incomes was taken by the wealth- of 10% with lowest, times (left scale) Income Gini coefficient (right scale) iest part of the population. Wage Gini coefficient (right scale)

33 Chapter 1

1.2.1. POVERTY LEVEL reduction in numbers of people with incomes AND DEPTH below the subsistence minimum. However, a steady trend towards poverty reduction has fficial Russian statistics on the poverty been clear since 2001, showing positive impact Olevel are based on the index of the num- of economic growth on incomes. ber of the poor, calculated as the share of the population with income below the subsis- an a poverty headcount be treated as a reli- tence minimum. Figure 1.4 shows develop- Cable poverty indicator? In some instances ment of this indicator and reveals significant the answer is yes: it is easy to understand and variation of index values in the years of use in practice, and is a perfectly adequate ana- reform. After a surge at the start of transfor- lytical instrument for appraisal of general mations, poverty indicators then declined progress in poverty reduction. However, a steadily until 1995 with a particularly sharp poverty headcount is inadequate for some pur- decline in 1994. However, this had nothing to poses, including analysis of the impact of some with specifics of socio-economic policies or political measures on poverty. For example, a institutional change. The semblance of radi- poverty relief program may be aimed at the cal poverty reduction at that time was due to very poorest, and may substantially raise their change in the methods used for constructing incomes without taking them out of the poverty the income distribution series. group. In such cases the poverty gap indicator gives the most accurate estimate of trends. This overty increased to some extent in 1995 indicator can be calculated in different ways. Pdue to a domestic banking crisis, after The official Russian statistics calculate it as the which the situation improved up to the crisis of sum of additional income, which those below August 1998. Following a painful aftermath in the poverty line would need in order to reach 1999, there has been a further steady reduction the line, expressed as a percentage of total in poverty. This process started in 2000, but was income. Development of this indicator is pre- not immediately visible: Russia established a sented in Figure 1.4. It shows that in 2003 erad- new higher subsistence minimum in that year, ication of poverty would have required redistri- so growth of real incomes did not produce a bution of 2.6% of total incomes. However, in a situation where incomes of wellpaid social stra- Figure 1.4. Official estimates of the ta are increasing further, the poverty gap may poverty level and poverty gap based on shrink even when poverty is becoming more 8 macroeconomic data acute. If incomes of the poor do not change,

5.9 but general income growth is observed, the 45.0 6.0 5.3 poverty gap expressed as a percentage of total 5.0 40.0 4.8 5.0 4.4 income shrinks. 35.0 3.8 30.0 3.5 3.6 4.0 3.3 3.1 he most informative indicator is the per- 25.0 2.8 2.6 3.0 Tcapita poverty gap, or income deficit. i.e. 20.0 2.1 the difference between average income of 15.0 2.0 those below the subsistence minimum and 10.0 1.0 that minimum itself, expressed as a percent- 5.0 33.5 31.5 22.4 24.7 22.0 20.7 23.3 28.3 29.0 27.3 24.2 20.4 17.8 age of the minimum. Farreaching conclusions 0.0 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 can be based on the series of distributions for level of poverty, % of the total population this income deficit. The indicator is not pub- deficit of cash income, % of the total volume of cash income

34 Human Development Report for the Russian Federation 2005 lished in official statistics, so we have to rely Table 1.1. Poverty level in 2003, % here on the NOBUS data. We find that estimates of poverty incidence based on these data do not tally with official estimates (Table 1.1). The discrepancies are due to use of different data to measure incomes (actual incomes, spending and available resources9), and use of different sources for the data (macroeconomic *Official poverty level estimate statistics or household surveys). NOBUS **HBS – Household Budget Surveys, carried out quarterly by the Federal State Statistics Service shows a higher poverty incidence than official estimates, and methodological inadequacies substantially reduce numbers of the poor at of the official estimates suggest that these dif- minimal cost. Second, about 8% of poor fam- ferences should be taken seriously. Discussion ilies will remain poor even if a considerable of approaches to defining poverty is beyond part of income is redistributed for their bene- the scope of this report, but the NOBUS results fit, so they need special programs targeted at suggest that 26.0% of households, or 33.4% of reducing the depth of poverty. The latter the Russian population, are in poverty. group should be the addressees of measures implemented under the First Development et us consider now the income deficit indi- Goal in the Millennium Declaration, which Lcator, calculated using the NOBUS data, targets eradication of extreme poverty. and measured as a percentage of the subsistence minimum indicating how much should be additionally paid to the poor to raise their 1.2.2. PROFILE AND CAUSES incomes to the subsistence minimum, i.e. to OF RUSSIAN POVERTY bring them out of poverty. The average income deficit of the poor is 28.7%. This justi- he poverty profile in Russia identifies fies the conclusion that poverty in Russia does Tthree household categories: not run too deep. The income deficit in the – Traditionally poor (families with many majority of poor families does not exceed 20% children, families with less than two par- of the subsistence minimum. Only 8.5% of ents, and pensioners living alone), who poor families suffer a deficit in excess of 60%. represent about 30% of total poverty and 35% of the total income deficit. Pensioner he implication is that a large share of poor families in this group are not usually in TRussian households are concentrated near acute poverty, but families with many the poverty line, and only about a tenth of children or less than two parents may be. them are in desperate want (lacking means for – The largest poverty group consists of two- subsistence). The fact that poverty is not deep parent families with 1 or 2 children. They offers some reassurance about developments make up 40% of total poor families and in Russian living standards, and the concentra- account for 35% of total income deficit. tion of households near the poverty line sug- – Childless mixed sex families represent gests a large amount of temporary poverty. 25% of total poverty and account for 18% of income deficit. hat suggests two completely different Tstrategy options. First, programs to sup- his profile shows that children are signifi- port people living near the poverty line could Tcantly affected by poverty in Russia: they

35 Chapter 1

are among traditional risk groups, but can work, is a widespread life style among those also be drawn into poverty when they live in who are in poverty for an extended period. complete families, since parents with two or more children have to spend more. he most at risk among two-parent families Twith 1 or 2 children are young families, he poverty profile also warrants the con- since birth of a child entails a double depend- Tclusion that traditional poverty factors, ency burden: care of the child and maternity related primarily to a dependency burden leave of at least a year and a half for the moth- from people who are incapacitated, are not of er (although maternity leave is officially paid).

Nearly every second poor family amilies with many children, families with includes workers with wages below the Fless than two parents, as well as pensioners subsistence minimum. and the disabled are traditionally vulnerable household groups with higher poverty risks. key importance in contemporary Russia. The Vulnerability here is associated either with lack main factors determining poverty are two- of a provider in the family or a high dependen- fold: wages below the subsistence minimum cy burden, or limitations due to health. and unemployment among ablebodied household members. nalysis of the profile and causes of pover- Aty in Russia is incomplete without consid- ow wages are definitely the main factor: eration of differences arising from geographi- Lnearly every second poor family includes cal location and settlement types. Differences workers with wages below the subsistence between poverty and household income levels minimum. But unemployment is also a signif- due to geography (territorial disproportions in icant factor: every tenth poor family includes economic development) are characteristic of an ablebodied member, who is looking for any country. But such territorial disproportions work. However, it has to be pointed out that are strongest in countries experiencing catch- up growth, including transition economies. The number of poor households with Issues of regional differentiation are reviewed members who are jobless but not seeking in detail in a separate chapter of this Report, work is much higher (30% of all poor but it is important to emphasize here that loca- households). So unemployment among tion and settlement type are major contributors the ablebodied is not only a consequence to income differentiation in Russia. The main of labor market deformations, but is a point is that the share of Russia’s rural popula- part of the economic behavior strategy of tion in total numbers of those in poverty (40%) households. is almost 1.5 times bigger than the share of the number of poor households with mem- rural dwellers in the total population. bers who are jobless but not seeking work is much higher (30% of all poor households). So he analysis so far in this Chapter of the unemployment among the ablebodied is not Tlevel, profile and causes of poverty sug- only a consequence of labor market deforma- gest a few conclusions about policies aiming tions, but is a part of the economic behavior to relieve poverty in Russia: strategy of households. A model of economic 1. The peculiar feature of Russian poverty is behavior, where one parent receives a low that the “working poor” account for more wage and the other is not working or seeking than 50% of poor households, and that the

36 Human Development Report for the Russian Federation 2005 level of poverty in such households is usually is even lower than the NOBUS poverty figure not deep. These families are usually poor for all households. Pensioners may subjective- because of low levels of labor remuneration ly position themselves in the poverty group and unemployment of ablebodied members due to problems, which they currently experi- of the household. ence with access to medical services. 2. Traditionally poor categories of the popu- 5. Geographical location is the most impor- lation are not the biggest group among the tant factor determining welfare inequality in poor because of their low representation in Russia today (its significance increased in the the total population. However, they are most period from 1992 to 2001)10. All other things at risk of poverty and suffer the highest being equal, the biggest contribution to gener- income deficit, so they are more likely to be in al and extreme poverty comes from depressed the poorest group. Children stand out among regions and rural areas. The fact that stagnant particularly high risk groups: their chances of poverty is also concentrated in such locations being among the poorest group are very high. emphasizes the limited capacity of overall eco- 3. Russia already has a stagnant poverty nomic growth to overcome extreme forms of group, consisting mainly of those in extreme poverty. Targeted programs are the most effec- poverty and totaling about 5% of the Russian tive way of dealing with such poverty but they population. The stagnant group includes tradi- need to be specially tailored to the scale, forms tional poverty categories, but also contains fam- and causes of poverty in Russia. ilies with inactive ablebodied members who have lost touch with the labor market. Despite current economic growth in Russia, the 1.3. STRATEGIES FOR POVERTY extremely poor will not be able to improve their REDUCTION IN VARIOUS SOCIO- income status due to inadequacy of targeted ECONOMIC DEVELOPMENT SCE- social programs for the poor in general and lack NARIOS of special programs for the extremely poor. 4. Pensioners are not particularly at risk of hatever a country’s macroeconomic poverty and are unlikely to be in extreme Wconditions, measures for poverty alle- poverty. This result is clearest when we use viation always work in two directions: available resources (monetary and nonmone- – stimulating growth of economic activity tary) as the criterion for level of current welfare. and mobility of the ablebodied population This is largely explained by the fact that pen- to bring their families out of poverty; sioners are principal beneficiaries of benefit – creating an effective system of support programs targeting specific population groups. for socially vulnerable groups (the elder- Households with disabled members are at ly, the disabled, families with a high increased risk of poverty, but the risk varies sig- dependency burden, families in a critical nificantly depending on severity of the disabili- situation – refugees, etc.) and guarantee- ty. The poverty level is highest (56.1%) in cases ing non discriminatory access to free or where the disabled member receives an subsidized social services. allowance as never having worked (i.e. is severely disabled), and is lowest (25.1%) n Russia two key problems need to be solved among families, whose disabled member is a Ibefore ablebodied people can escape from so called Level-3, Group-1 invalid, receiving an poverty by their own efforts: first, the number allowance associated with limited ability to of workers with wages below the subsistence work. It should be noted that the level of 25.1% minimum needs to be reduced and, second,

37 Chapter 1

legitimate employment needs to be expanded. ow the targeting principle is realized Resources for increasing wages of low income Hdepends on the general social policy workers, mainly employed in farming, con- context, but assistance should be based on struction, trade and the public sector, should the following system of social preferences: come from sustainable economic growth and the best option is to be in paid employment; improvement of distributive relationships. if that is impossible, to enroll in employment Most experts, managers and politicians focus programs; if that is impossible (duet to on the need to raise minimum wages to the absence of such programs, poor health, dis- level of the subsistence minimum. There is real abled dependents, etc.), to enroll in a target- opportunity for achieving that in Russia today, ed social aid program. Depending on the rel- since numbers of people employed in the non ative benefits offered by employment, partic- market sector of the economy are declining ipation in public (temporary) works and target and marketbased organization is expanding in social aid programs, barriers should be built traditionally public sectors of the economy. to restrict access to the latter. That can be achieved either by varying the poverty criteri- mprovement of distribution relations is main- on, which decides access to aid programs, or Ily a matter of reducing unofficial “flexible” by prohibiting access to targeted social aid forms of remuneration and reducing wage dif- for certain categories of people and house- ferentiation within and between sectors. holds (e.g. for the ablebodied).

ore targeted social aid and increase of he Medium term Program for Socio- Mallowances and subsidies for the poor TEconomic Development of the Russian can also help socially vulnerable groups to Federation (2005-2008) considers two possi- escape poverty. This part of the general ble scenarios for economic development. The poverty alleviation strategy contributes base scenario reflects current trends in eco- directly to implementation of the Millennium nomic competitiveness and efficiency and Development Goals, but we stress again that does not envisage implementation of any such programs will not have a decisive new large scale national strategies or proj- impact on Russian poverty incidence, and ects. However, it assumes growth of real per- their key objective is to reduce the depth of capita income, wages and pensions. Under poverty and eradicate extreme poverty. this scenario the average wage should reach 320% of the subsistence minimum for the ussia currently operates the following ablebodied population by 2008, compared Rtargeted social programs: with 262% in 2004, while pensions should rise – Housing subsidies for the poor, which to 128% from 108%. benefited 15.2% of all Russian families in 2003 and used 30.7 billion rubles of overnment forecasts do not consider financing. Gprocesses in the labor market and employ- – Monthly children’s allowances for poor ment, or developments of income differentia- families, which were given to 63.9% of total tion. Labor remuneration and employment lev- children in the relevant age group in 2003. els are currently balanced at relatively low lev- – Targeted allowances for the poor, provid- els of remuneration. Any changes in remunera- ed under the Federal Law “On State tion will entail changes in employment levels, Social Assistance” and under various and the balance of losses and gains will not regional legislation. necessarily be to the benefit of the poor.

38 Human Development Report for the Russian Federation 2005 he evolutionary nature of changes in eco- and other raw materials. But income forecasts Tnomic institutions makes rapid increase of under this scenario differ little from the base the incomes of poorly paid and needy members scenario: the difference is between 38.4% of society unlikely. It is also a fact that Russia’s increase of real wages from 2004 to 2008 raw materials economy stimulates inequality, under the base scenario and 45% increase so that fairer distribution of income is difficult to under the innovation scenario. Real incomes achieve. An inertial development scenario is would grow by 33.9% or 40.4% respectively. bound to mean increase in the price of housing and utilities, education and healthcare for con- If we refer Russia to the second group of sumers of these goods. The outcome may even countries, with a USD 2.15 poverty line, be an increase in poverty. Persistence of high the poor are those with monthly expen- inequality and poor conditions for creation of ditures below 775 rubles (6-7% of the medium- and highly-paid jobs effectively block population), if Russia is given a poverty development of efficient target programs for line of USD 4.3 the poor are those with those in extreme poverty, since less poor and monthly spending below 1550 rubles (30- better educated strata of society will ensure that 33% of the population). they obtain priority access to social aid. The innovation scenario is supposed to his situation is aggravated by a peculiar reduce poverty to 10.2%. We do not want to Tfeature of the Russian social protection judge the feasibility of implementing the inno- system – an extended social support system vation scenario, but we would say that it for certain categories of the population who makes measures to raise living standards and are not poor. Modernization of the benefit achievement of goals for living standards look system has not increased access of the gen- more realistic: it calls for investment in sec- uinely poor to social support programs. tors, which are decisive for poverty levels, Indeed, this reform has actually widened the countering inequality by encouraging a form gap between the problems of the poor and of economic growth, which stimulates the priorities of social protection. incomes of middle and low income social strata. The innovation scenario also includes he Ministry of Economic Development and measures to reduce interregional differences, TTrade believes that substantial poverty re- which will also reduce inequality. duction (to 12% in 2008) is possible under the base scenario, but such an outcome looks e would stress that the MDG tasks of unlikely in a situation of over-optimistic fore- Wreducing and eradicating extreme casts for the consumer price index (clear in poverty do not figure in Russian statistical 2005) and disregard of income differentiation monitoring, action programs or development trends. Efforts to stimulate the most efficient scenarios. That partly reflects confidence that centers of economic growth are likely to hunger and extremely low living standards increase inequality instead of reducing poverty. are not a problem in Russia.

he Medium range Program also considers he findings, which we have referred to, Tan innovationintensive scenario based on Tdo not fully confirm that and suggest that major structural shifts towards hitech and the problem is not automatically solved by information sectors of the economy with economic growth. But our analysis also sug- reduced dependence on exports of oil & gas gests that Russia will be able to cope with

39 Chapter 1

extreme forms of poverty among nonmargin- ty. The present system of poverty indicators is al groups of the population in the period up to focused on general trends, without linkage to 2015. The key instrument for that purpose current policy measures or assessment of would be a guaranteed minimum income for their efficiency. Adapting poverty monitoring both the employed and those unfit to work. to political tasks requires changes in: Its level would be below the applicable sub- – organization of poverty data sources (most importantly, modernization of the The 2005 reform of benefits in kind household budget survey network and (based on replacement of such benefits creation of procedures for monitoring by cash allowances) shifted the emphasis income at the household level); of social policy further towards nonpoor – methods used to calculate existing indica- groups, since the poor had limited access tors (income deficit, poverty profile, general to such benefits, and high costs of the inequality measurement and construction of reform have left scant resources available the model frequency series by income). for programs targeting the poor. – the system of indicators (analysis of poverty data should start to use the sepa- sistence minimum, but not lower than USD rate components of poverty indices). 2.15 a day, converted into rubles by PPP linked to the consumption structure of the list of proposed indicators and their poorest social strata. Adescriptions are given in Appendix 1.2.

ence, assuming the innovation-intensive Hdevelopment scenario and a guaranteed 1.5. CONCLUSIONS AND minimal income level for the poorest mem- RECOMMENDATIONS bers of society, Russia should be able to achieve the following results by way of pover- iewing Russian poverty dynamics and ty alleviation: Vsocio-economic policy from the perspec- – halving the level and depth of poverty; tive of progress in attainment of the – eradicating extreme forms of poverty. Millennium Development Goals, it is clear that the Russian national poverty concept is he system of indicators describing far removed from the concept of extreme Tprogress in attaining this goal and poverty, whose alleviation the world commu- dynamics of their values up to 2015 are pre- nity is focusing on. The Russian poverty stan- sented in Appendix 1.1. dard is much higher: even the World Bank’s absolute poverty line for developed countries (USD 4.3 dollars a day in terms of PPP) is only 1.4. DEVELOPMENT OF OBJEC- 60% of the Russian official subsistence mini- TIVE INDICATORS FOR POVERTY mum. This result suggests that extreme MONITORING forms of poverty are not a problem for Russia, and Russia may be positioned as an f eradication of extreme poverty and allevi- international donor rather than recipient in Iation of general poverty are to be national efforts to resolve this issue. priorities, the Russian poverty monitoring system needs indicators, which can measure his is supported by the fact that numbers the level, depth, profile and causes of pover- Tof the poor in Russia have been dimin-

40 Human Development Report for the Russian Federation 2005 ishing since 2000. Growth of real wages and Box 1.1. Poverty measurement in Russia The purpose of poverty measurement is to appraise the efficiency of strate- pensions has lifted people who were previ- gies used to combat it. That depends on methods of calculation, which ensure impartiality and integrity of data sources. ously just below the poverty line out of Distribution of incomes and goods is more unequal in modern Russia than in poverty. Most of these people are families of the USSR, and a poor stratum has developed, which exerts substantial influence on state social programs. Implementation of poverty relief measures is compli- the working poor (the largest group with cated by very uneven distribution of disadvantaged groups across the country incomes below the subsistence minimum in and peculiarities of such groups in certain regions. People whose income is below the value of a basket of goods and services, Russia) and pensioners. Further reduction of calculated on the basis of a minimum national consumption standard, are poverty among workers should enable classed as poor. This approach uses a concept of absolute poverty, by which the poor are those people who cannot secure consumption at a level required to sus- Russia to further reduce the number of peo- tain health and support labor activity. Another type of definition (relative poverty) defines the poor as those who have the lowest incomes in society. ple below the poverty line. Some countries have legislative provisions which decide whether a specific person or household should be categorized as poor. By generalizing data on the number of such people, who receive assistance via state social programs, we xtremely poor groups, who are the focus identify the “visible”, officially registered poor. But design of an overall policy on Eof MDG activities, are in a minority poverty must also take account of people who have been unable to prove their poverty to social security organizations. That requires statistical evaluation of the among Russia’s poor, representing only 3- incidence, level and depth of poverty by processing data collected from house- 5% of the total population living in households in government surveys. Statistics agencies in some countries also use socalled deprivation methodol- holds. However, this level ought to be high ogy, which defines people as poor if they are deprived of wealth items that set enough to provoke government concern. It the consumption standard for that society. Assessments of underconsumption are based on comparison with certain standards, which are relative rather than is particularly important to stress that many absolute, as they depend on temporal, national and territorial features. Such research considers: availability of food and clothing suited to natural and climatic of the Russian families in extreme poverty conditions; healthcare and education; quality of housing; life and property secu- are families with children. Underinvestment rity; employment and labor conditions; communications; etc. People who lack such amenities are defined as poor. Russia is currently carrying out experiments in the younger generation will put barriers to define a poverty index based on specific wants. The index will be used in offi- on the road to successful growth. It is there- cial statistics, taking account of recommendations of international organizations, best foreign experience and Russian conditions. fore essential, first, that extreme poverty The World Bank has split all countries into three groups for purposes of inter- should be made an object of statistical national poverty comparisons. The poverty line for the first group has been set at percapita daily spending of USD 1 by PPP. For the second group the figure is observation in the framework of poverty USD 2.15 and for the third USD 4.3. In Russia people are officially classed as poor if their incomes are below the monitoring and, second, that social policy poverty line, defined as the income necessary to buy a scientifically based minimal measures should be implemented to eradi- set of goods and services for supporting human activity. This allows construction of a poverty line for whole households, based on subsistence minimums of all its cate such extreme forms of poverty. The lim- members (consumer baskets determined by the consumer’s sex and age). ited incidence of extreme poverty suggests In the fourth quarter of 2004 official statistics found 25.5 million people in Russia, or 17.8% of the population, to be poor. Rural areas are most affected by that this social challenge is well within avail- poverty: 60% of all poor people live in the countryside. There is a high percent- able Russian budgetary and economic ca- age of families with children among the poor: more than half of all twoparent families with 1 or 2 children are poor, and three quarters of all twoparent fami- pacities. The key problem is that institutions lies with 3 or more children. The incidence of poverty among families with less responsible for provision of resources to than two parents and with 3 or more children is 85%. Two thirds of all persons temporarily out of work and more than half of those not working due to a dis- extremely poor groups may be unable to ability are members of poor families. However, ablebodied people who work but cannot earn enough to support themselves and their dependents also make up cope with the situation on their own. It is a significant part of Russia’s poor. also important that social support should be The level of poverty in Russia is notably higher than in developed countries and in Central Europe. In Japan the share of people with incomes below the accompanied by measures of social control poverty line is 4%, in Finland 4.9%, in the Netherlands 6.1%, and in Sweden 6.7%. and responsibility on the part of recipients. However, it is surprising to find that only 6% of Chinese are officially poor, while in Germany the figure is 9.1%, in Italy 11.2%, and in USA 13.3%. Clearly official poverty statistics depend directly on the standards, which national legislation part from monetary poverty, Russia has provide for use by national statistics services. That is also demonstrated by comparison between findings using the World Bank poverty criterion of USD 1 per- Aevolved new forms of poverty manifest- capita spending by PPP and national statistics. In most countries (including Russia) national poverty level appraisals are higher than those based on the USD ed in limited access to education, healthcare 1 criterion. In the late 1990s in Chile the share of the poor, based on the official and decent housing. The poverty profile poverty line, was 20.5%, while the share of people with daily expenditures below USD 1 was 15%. The respective figures in Tanzania were 51.1% and 19.9%, in linked to these indicators suggests that pen- Morocco 19% and 1.1%, in Brazil 17.4% and 5.1%, in Bangladesh 35.5% and sioners are among high risk groups. 29.1%, in Indonesia 20.3% and 15.2%, in Kirghizia 54.9% and 18.9%, and in

41 Chapter 1

Pakistan 34% and 31%. However, in India, Nigeria and China poverty levels by able groups out of its socio-economic national measurements is lower than using the World Bank criterion. If we use the poverty line of USD 1 by PPP, then the poor in Russia will be development priorities. Russia has almost people whose daily expenditure in 2004 was about 12 rubles (or 360 rubles a month) when the official average annual exchange rate was 28.8 rubles per no programs addressed exclusively to USD. If we refer Russia to the second group of countries, with a USD 2.15 those in extreme poverty, so the situation poverty line, the poor are those with monthly expenditures below 775 rubles (6-7% of the population), if Russia is given a poverty line of USD 4.3 the poor of the extremely poor is not improving. The are those with monthly spending below 1550 rubles (30-33% of the popula- 2005 reform of benefits in kind (based on tion). For comparison, the official poverty line in the fourth quarter of 2004 approved by a Resolution of the Government of the Russian Federation No. replacement of such benefits by cash 105 of March 2, 2005, was 2451 rubles. allowances) shifted the emphasis of social Obviously, poverty cannot be comprehensively described as a socio-economic phenomenon by a single indicator. A system of indicators is needed, policy further towards nonpoor groups, which should include: since the poor had limited access to such – an absolute approach, whereby the poor are those people and households whose incomes and consumption are below the standard statutory mini- benefits, and high costs of the reform have mum income or the minimum consumption level; – a relative approach, whereby the poor are those people and households left scant resources available for programs whose incomes are below the average for the country; targeting the poor. – a subjective approach, whereby the poor are those who view their own material situation as one of poverty; – a deprivation approach, whereby the poor are those denied access to a he Government’s scenarios for socio-eco- standard socially recognized set of amenities and services; – an international approach, whereby the poor are those who spend no more Tnomic growth, reviewed in this Chapter, than USD 1 (2.15 or 4.3 dollars) per day in PPP terms. are also mostly oriented to improving living A.E. Surinov standards of people on medium incomes and Improved access to decent services and those living near the poverty line. Creation housing will assist poverty reduction. and development of real targeted programs for the extremely poor should be given a eneral economic growth has become place in Russian mid range development pro- Gthe key motor for positive poverty grams and budgeting. Otherwise, headway in dynamics in Russia, and this has encour- general poverty indicators in Russia may be aged the government to leave resource accompanied by a reverse trend in extreme redistribution to extremely poor or vulner- forms of poverty.

1 The dollar is converted into the ruble at the purchase power parity (PPP) exchange rate. In 2000 purchase power parity (ruble/US dollar) was 7.28 rubles per dollar, and in 2002 it was 9.48 rubles per dollar. 2 Turning reforms to the benefit of all and each one: poverty and inequality in Europe and Central Asia. World Bank, Washington 2001, p. 31. 3 In 2003 under the sponsorship of the World Bank the Russian Statistics Agency carried out a “Natsional’noe obsledovaniye blagosostoy- aniya naseleniya i ego uchastiya v sotsialnykh programmakh” (NOBUS in the Russian acronym) of 44,500 respondent households in order to collect information on employment and household incomes and spending. Analysis of these data and review of published official statistics allow detailed analysis of the level, profile, causes and factors of poverty in Russia. 4 FAO uses the calorific values of daily food consumption to divide countries into categories with sufficient or insufficient levels of nourishment – the criterion for undernourishment is daily consumption below 2400 kcal per capita. 5 A. Baturin, M. Lokshin. Issledovaniye komponenta pitaniya pri analize bednosti i obosnovaniye granitsy bednosti. Moscow, 2003, World Bank Report, p. 10. 6 Baturin A.K., Tutelyan V.A., Ovcharova L.N. et al. Pitaniye i zdorov’e v bednykh sem’yakh. Ministry of Labor and Social Development et al. – å.: Prosveshenie, 2002. - 304 p. 7 The World Bank Group. Health, Nutrition & Population. Washington D.C., 1997, 97 p. 8 Sources: 1. Russia in Figures. 2004: Digest of Statistics/ Federal State Statistics Service – å., 2004. – pp. 99-100. 2. Sotsial’noe polozheniye i uroven’ zhizni naseleniya Rossii: Digest of Statistics / Goskomstat of Russia – å., 2001. – p. 24. 3. Sotsial’noe polozheniye i uroven’ zhizni naseleniya Rossii: Digest of Statistics / Goskomstat of Russia – å., 1997. – p. 9. 9 Available resources include all cash proceeds. 10 Vstupleniye Rossii v WTO: Mnimye i realnye sotsial’nye posledstviya. NISP, - å., 2004 , p. 58

42 Human Development Report for the Russian Federation 2005 Appendix 1.1

Table. MDG Goal 1. Eradicate extreme poverty and hunger

43 Appendix 1.2

OBJECTIVELY MEASURED INDI- indicators within the system of state CATORS SHOULD INCLUDE: poverty monitoring will require serious changes in the current system of poverty – Cost estimate of minimum consumer data sources. In the first place, a process budget. This is already used in manageri- of income monitoring has to be set up at al and statistical practice and is viewed as the household level, since lack of such a general poverty indicator. Although information prevents us from understand- many experts and politicians argue for the ing what types of income deficiencies play need to revise the methodology of assess- the biggest role in creating poverty ing the subsistence minimum, such revi- groups. At present, this problem is partial- sion does not seem practicable until mini- ly addressed by using data from Russian mum wage and significant social benefits Monitoring of Economy and Health are raised to the indicated level. (RMEH) and NOBUS. However, usefulness Otherwise, economic weapons for fight- of RMEH is limited by its limited sample ing poverty will come into collision with size and NOBUS is a snapshot observa- methodological changes, stimulating tion, whose data will quickly become growth of poverty. obsolete. – Extreme poverty line. This indicator is a – Aggregated total characteristics of income key index measuring progress in attain- differentiation, including decile fund dif- ment of the Millennium Development ferentiation factor (ratio of incomes of Goals, but it is not included in official bottom 10% to incomes of top 10%) and Russian measures of poverty. Regional Gini coefficient. Accuracy of their meas- authorities generally use a surrogate urement could be improved by a set of equal to half of the minimum consumer measures to improve their statistical base, basket for the purposes of targeted social i.e. by modernization of the HBS concept. programs. For Russian conditions we sug- – Indices of statistical and dynamic decom- gest for the minimum extreme poverty cri- position of inequality (Teil indices). This terion should be daily spending of USD inequality decomposition instrument is 2.15 converted to rubles on PPP basis. not yet applied in poverty analysis, – Distribution series by income, expendi- although it would allow identification of ture and available resources. These in- the most significant factors of inequality struments of analysis are already used in and poverty. Use of Teil indices for pover- the present system of statistically ty analysis is currently impossible observed indicators. However, the results because analysts have no access to pri- of simulation on the basis of macroeco- mary data bases, while statistics agencies nomic assessments should be harmo- are not familiar with the methodology. nized with results of the Household – Index of prevalence of general and Budget Survey (HBS), which will require extreme poverty measured as the share adjustment of the distribution series by of population with incomes below the income and a system for collecting and subsistence minimum. The methodology weighting the HBS data. used in its calculation is affected by the – Structural characteristics of incomes and same limitations, which affect measure- expenses in aggregate form and with ment of incomes, spending and available breakdown by decile and socio-demo- resources. graphic groups. Implementation of these – Income deficit (extra income, which the

44 Human Development Report for the Russian Federation 2005 poor would need in order to escape pover- – Poverty profile indicators which allow ty) on the macroeconomic and individual appraisal of poverty structure and risks level. In the former case the indicator is cal- of falling below the poverty line for culated as a percentage of total household certain sociodemographic groups. The income, in the latter case as a percentage of breakdown data allow assessment of the percapita subsistence minimum. Deficit poverty profiles for regions, settlement of individual income is not yet a part of offi- types, gender and demographic fac- cial statistical poverty monitoring. Our tors. Poverty profile analysis helps to analysis suggests that there are no serious identify vulnerable groups and key technical obstacles to its realization. causes of poverty.